As you’ve probably heard by now, both the House and the Senate have passed their versions of a tax reform bill set to take effect for 2018. This does indicate that it is very likely that there will be some sort of tax reform coming. And the question everyone has is – how does this affect me?
The answer right now is – it doesn’t, not YET. The next step in the process is for members of the House and the Senate to work together to draft a bill that can be approved by both of them. And that final version of the bill may look very little like either one. In the versions already passed, there are significant differences which can affect the changes to your personal taxes.
The most likely items to be approved would be those that are the same in the current two bills. The major items that could directly affect your taxes are:
- The standard deduction for single filers is being raised to $12,000 and for married filing joint, $24,000.
- The personal exemption will be eliminated.
- The child tax credit will be raised from the current $1,000 level – but the final amount is still up for debate since the two versions of the bill do not agree.
- The itemized deduction for state and local income and sales tax will be eliminated.
- The real estate tax deduction will be kept, but there will be a cap of $10,000 on it.
- The top corporate tax rate will be lowered from 35% to somewhere around 20%. While both bills approved the 20% tax rate, it is possible that some adjustment may be made to that final rate.
- The exemption for the estate tax will increase from $5.5 million to $11 million. While the House version of the bill eliminates the tax entirely in 2023, the Senate version does not.
Other items that have been affected by the bills but will be included in debate as the current bills are much different. While it’s impossible to list all of them, the biggest ones that would affect the most taxpayers are:
- Income tax bracket changes have been approved on both bills, but are quite different. Currently there are 7 tax brackets with the lowest being 10% and the highest at 39.6%. The House version changed the current 7 brackets to 4 with the lowest being 12% and the highest being 39.6%. The Senate bill keeps the 7 brackets and retains the 10% level, while the highest level changes to 38.5%. How many brackets are finally approved and at what levels is yet to be determined.
- The mortgage interest deduction is retained on both bills, but the allowed amount is very different. Current law allows a deduction on mortgage interest paid on the first $1 million of a mortgage. In the approved House bill, the deduction is only allowed on the first $500,000 of a mortgage. The Senate has kept the deduction on the $1 million of a mortgage.
- Other itemized deductions have been changed by the bills, but there are significant differences between the two. The House version completely eliminates the deductions for medical expenses, tax preparation expenses, personal casualty losses, moving expenses, and limits the charitable contribution deduction. The Senate version retains the medical expense deduction and eliminates the deductions for moving expenses and tax preparation.
- For those taxpayers who run a small business, each of the bills changes the way profits will be taxed. The House version includes a cap on the maximum tax rate to be paid on “pass-through” businesses of 25% while the Senate version includes an exclusion of taxable income of up to 23% dependent upon certain income limitations.
- The Alternative Minimum Tax (AMT) which limits certain tax benefits for high income earners is eliminated in the House version of the bill. The Senate, however, retains the tax but reduces the number of people that would have to pay it.
- The Affordable Care Act (healthcare or Obamacare as it is known) currently penalizes taxpayers who fail to obtain health insurance for the full year. The Senate bill would repeal the individual mandate so that no penalties would be levied on those taxpayers. The House version makes no changes.
As you can see, there is still a lot of work to be done in the coming weeks to finalize the tax reform bill that will eventually find it’s way to the president’s desk. The most likely measure to be included are the ones that both houses have already agreed on and were included in their original bills. For those above that are significantly different between the two bills, it’s probable that there will be changes to at least some of these, but at this time it’s impossible to know what the final results will be. Find out more about the possible tax reform.
For more information on this important matter, and to learn more about how you might be affected, contact us here!